Hedge funds will be drooling at the latest news on Yahoo! and Microsoft. Microsoft has declared that it is interested in reopening talks to buy all or part of Yahoo! - if a new board is appointed first.

This announcement, just about a month before the internet company's (belated) annual shareholders' meeting, endorses the fading efforts of activist investor Carl Icahn to unseat Yahoo!'s chief executive, Jerry Yang, and the rest of the board that failed to reach an agreement on Microsoft's earlier takeover offer.

Microsoft says that, with a new board in place, it would be interested in discussing a deal either to assume Yahoo!'s search function 'with large financial guarantees' or to buy the company outright.

The opportunities for hedge funds are manifest. Paulson & Co, the New York-based hedge fund manager, has already thrown its weight behind Icahn's plans to challenge the Yahoo! board by putting forward an alternative slate of directors, on the grounds that the board had acted 'irrationally' in refusing the software giant's USD47.5bn bid.

In May, Paulson disclosed in a regulatory filing it had built up a stake of about 3.4 per cent of Yahoo! With the power of liquidity clearly belonging to hedge funds in the current market environment, expect more funds to join the fray.